John Cameron's personal blog

Serious discussion about your financial position now - and in the future.

TRAPS TO AVOID IN RETIREMENT - INVESTING TOO CONSERVATIVELY

There’s a common view that as you approach retirement you should tilt your investment portfolio towards more conservative investments. This means favouring things like term deposits, annuities and cash management trusts while reducing exposure to more volatile assets such as shares and property. The thinking is that preservation of capital is key, as without an earned income it is hard to recover from any downturns in the share or property markets. 

In the days of high interest rates this might have been a good strategy, but when interest rates are low and life expectancies long, being too conservative with investment can see the money running out way too soon.

Peter plans to retire on his upcoming 63rd birthday. He has $600,000 in super and wants this to provide him with an income of $50,000 per year. If his net return is 3% pa, Peter’s nest egg will last for just over 15 years . The problem is there’s a good chance Peter will live into his late 80s or even 90s. To give his savings a chance of lasting until he is 90 (27 years), Peter will need to target a net return of 7% pa.

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TRAPS TO AVOID IN RETIREMENT - GOING TOO HARD TOO FAST

Retirement: you’ve made it! And one of the rewards for all your hard work is that you can now access your superannuation. Suddenly a world of opportunities opens up – a Caribbean cruise, major home renovations or maybe helping your kids reduce some of their debt.

Of course you deserve to celebrate your retirement, but bear in mind that your super might need to support you for the next 30 years or more. Eat too far into your nest egg in the early days and you significantly reduce the time that your super will last. This is particularly the case in a low interest rate environment.

Take Ron and Val. They retire with a combined super balance of $800,000. At an interest rate of 4% pa this nest egg will fund annual living expenses of $60,000 for 19.4 years[1]. If they spend $100,000 on travel and home renovations and give a further $100,000 to their children, the reduced nest egg will now only last 13 years.

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LIFE STAGES SUPER – SOUNDS GOOD BUT DOESN’T STACK UP

There are a number of super funds built on the concept of “life stages”.

This means that the fund is heavily invested in growth assets such as shares and property when you are in your younger age. As you get closer to retirement, the mix of investments changes, and shifts more towards low volatility and low yielding things such as cash and fixed interest funds. Hence, the fund balance changes as you go through different life stages.

- There is a superficial appeal to this approach.

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HOW LOW CAN THEY GO?


We have the lowest interest rates in our history, and the Reserve Bank warns that we are in for a prolonged period of low rates.

But just how low can they go?

Well, there are trillions of dollars world-wide that is currently subject to NEGATIVE rates. That’s right, NEGATIVE interest rates.

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Cancelled insurance – a case of good intentions gone horribly wrong

Imagine the following. You know a young couple with a family, a mortgage, and all the other commitments that go with modern family life.

Then, tragically, one day one of the parents is killed.

When the survivor gets him or herself back together after a few days, the survivor contacts their insurance company, to lodge a claim, only to be told that their insurance has been cancelled because of changed government laws.

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